Overdosing on Heterodoxy Can Kill You

Ever since the 2008 crisis, it has been common to chastise economists for not having predicted the disaster, offering the wrong prescriptions to prevent it, or failing to fix it after it happened. But, while calls for new economic thinking may be justified, all that is new may not be good, and all that is good may not be new.

CAMBRIDGE – Ever since the 2008 financial crisis, it has been common to chastise economists for not having predicted the disaster, for having offered the wrong prescriptions to prevent it, or for having failed to fix it after it happened. The call for new economic thinking has been persistent – and justified. But all that is new may not be good, and that all that is good may not be new.

The 50th anniversary of China’s Cultural Revolution is a reminder of what can happen when all orthodoxy is tossed out the window. Venezuela’s current catastrophe is another: A country that should be rich is suffering the world’s deepest recession, highest inflation, and worst deterioration of social indicators. Its citizens, who live on top of the world’s largest oil reserves, are literally starving and dying for lack of food and medicine.

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School.

Mr. Hausmann's critique of Venezuelan economics under Chavez and Maduro is entirely valid... As is the indirect comparison to the Chinese Cultural Revolution (orthodox Communism worked better). However, he is notably reticent about how Venezuela languished in the decades before Chavez and Maduro. Venezuela was failing long before Chavez started digging Venezuela's grave.

Perfect market conditions cannot be assumed as a fact. Some reference should be made to monopolies and cartels which determine prices corrupting the system they defend. Could be just as bad as state fixed prices but worst if you consider it is being done quoting the superior parameters of Just Economy.
Populism and ultra-liberals are equally harmful for consumers.

Mr Recardo characterising the prices as mere information system to take or not to take in market is an unbridled free market view not warranted. If such view is taken,any monopolist or market dominator may fix and fleece the national as well as global consumers more than what the just market price or say Adams natural prices and get unjust enrichment. This is also a case for visible like OPEC and invisible cartels.

The most important material fact in the case Venezuela appears that it's production cost prices have exceeded the recent global free market oil price at $27 to 30 and became a victim nay the first bankrupt country totally depending on oil revenues.

Perhaps it pushed other countries including soudi and even Iran now as well as shale industry to disrupt the global market forces and conspire against the 'other world' to control market to increase their own collective revenue by manipulating prices in the process the Venezuela may also overcome the crisis.

The recession and inflation in venujula is perhaps a consequence of fallen oil prices and national revenue beyond its control and in fact the optimum global market prices must hover around 30 to 35/ barrel and any cartel price manipulation above that may amount excess profits to them so vessels at the cost global world and it may fuel and ignite another bout to already fragile financial markets by the aid of QE and near zero interest rates by Fed.

F.A. Hayek 72 years ago prevent this on his book The Road to Serfdom. Professor Hausmann is doing a wondeful job with his articles, giving the world a very clear explanation of what is happening in Venezuela. Fortunately, this disaster is about to end and the painful lessons that Venezuelans are paying and will pay, will let them to get rid of any heterodoxy idea or doctrine when they vote in any new election.

I would also like to say that there is type of thinking prevalent in economics which is best described as 'us vs. them'. Basically it says "...if you not for the US style of capitalism you are basically some variety of hippy or communist - and you are all the same."

Nothing could be further from the truth. Heterodox ideas are not all equal. For example, Venezuela confiscated all private assets - this is actually not heterodox at all but rather just an extreme version of a very orthodox idea that the government confiscates a large portion of every asset created - commonly called taxation. It is its extremism that caused the failure because taxation is a system working well in many countries today.

I think you came very close but did not hit the nail on the head. What is sacrosanct is not 'the free market' but rather the economic freedom of individuals. Just one example of this is to compare China today with USSR at collapse. The later collapsed because it gave individuals almost zero freedom to use their talents while China has flourished because it particular form of communism gives talented individuals opportunity to start businesses and use their skills. Look at the Nordic countries with their first world economies despite de-facto socialism resulting from high income tax rates - they respect the talents and efforts of the individual over that of the group. On the other hand their are some things that should not be left to free markets - e.g. provision of police services, emergency medical treatment, basic schooling (in poorer countries).

Mr Carpenter — unjust pharma prices are the signal the market is failing and new or different government intervention is likely necessary.

The "how much?" problem of healthcare is a second-order one, usually stemming from failing to have a good story of who's paying whom, for what, when. The US continues to struggle mightily with those latter 4 questions. Adding price controls to drugs in the current setup is probably not the solution you'd actually be happy with.

The notion that just prices are a bad idea reflects the very unique (to try to put it in a friendly way) understanding economists seem to have of "justice." It would be fun. I think, to read Mr. Hausmann's explanation of the beneficial effects -- economic and otherwise -- of UNjust prices. For examples to draw on, he could perhaps turn to some recent newsworthy events in the pharmaceutical industy :-)

Is this article about Venezuela or orthodox economics?
If it's about using Venezuela as an example to defend against the use of new economic thinking and abandonment orthodox economics, then it is a silly, bordering on stupid, argument.
Citing the cultural revolution is even more ludicrous.

Social structures and institutions are crucial to a country development.

Venezuela clearly has a social problem like Hausmann is protraying, but he forgets that on the other side is a oligarchie that is so blind, if not blinder, and who is partially responsible for the turn Venezuela has done.

This is a common problem in South America and in other parts of the globe, where the oligarchies are completly dumb to the life condition of the people and continue to run the countries llike they were in the 19th century.

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